Super needs right balance

Australian policymakers are justifiably proud of the compulsory superannuation system that was introduced in 1992. As much as $1.4 trillion is now saved in super funds, meaning that as a nation we have made significant progress towards building ­adequate retirement incomes, a problem with which many other advanced economies are still grappling.

Compulsory super has also been an extraordinary boon to the finance industry; the mandated contributions are the source of unrelenting growth and profitability.

Jeremy Cooper
, who devised the most significant reforms to the system so far, has pointed out that the finance industry may have lost sight of the fact that it is a delegate of the government in implementing an important part of social and ­economic policy.

The thrust of Mr Cooper’s recommendations to reform and improve the superannuation system have at their core a ban on financial adviser fees, and greater transparency. All funds will have to provide a low-cost default option called MySuper, which will offer very little investment choice but no entry fees, commissions or expensive add-ons either. Although MySuper products will replace existing default super funds from July 2013, many not-for-profit super funds and commercial financial institutions have already started marketing these new low-cost superannuation products.

Mr Cooper, who is now immersed in the for-profit side of the industry as the chairman of retirement incomes at ­Challenger, has raised concerns that some super funds will try to channel fund members out of these lower-profit, no-frills products. Certainly there will be great incentive to do this as they will be low-margin products. And if Australians start paying more attention to their super funds, they may tire of the limited investment choice offered by MySuper products. But it is crucial that the for-profit part of the superannuation industry adopts the MySuper reforms as well.

The super industry has enjoyed a bonanza for the past 20 years, with guaranteed contributions flowing in – in many cases regardless of fund performance or market conditions, and with few requirements of disclosure or transparency. Mr Cooper is right to point out that superannuation fund managers must balance the duty of care they owe to fund members and the profit sought by the owners of their business.

Superannuation is a highly tax-concessional savings pool that is aimed at building adequate retirement income for fund members, and is not just a honey pot of fees for the industry to plunder.